Florida Real Estate Exam Prep 41, Sales Comparison and Cost Approaches

0:00We are covering the sales comparison and cost approaches. Two critical valuation topics you must know for the Florida Real Estate Sales Associate Exam. First, the sales comparison approach is based on the principle of substitution, meaning a buyer won't pay more for a property than what a similar one recently sold for. The exam will test your ability to select the best comparables, which are properties that are recent, nearby, and similar to your subject property. The most tested concept and a common trap is the direction of adjustments. You always adjust the comparable property, never the subject property. Imagine your subject property has three bedrooms, but a comparable property that just sold for $210,000 has four bedrooms. The comparable is superior to the subject. If a bedroom is worth $10,000, you must subtract that amount from the comparable sales price. So $210,000 minus $10,000 gives an indicated value

1:01of $200,000 for the subject property. A great way to remember this is the phrase CBS CIA. If the comparable is better, subtract. If the comparable is inferior, add. After adjusting several comparables, and a praser reconciles them, giving more weight to the comps that needed the fewest adjustments to derive a final indicated value. Next is the cost approach, which is ideal for unique properties without many comparables, like a school or church. The formula is cost to build new, minus accrued depreciation plus the land value equals the property value. A major point of confusion on the exam is the difference between reproduction cost and replacement cost. Reproduction cost is the cost to build an exact replica of the building, using the same materials and design, which is often used for historic properties. Replacement cost is the cost to build a structure with the same utility, but using modern, current materials and methods.

2:02The exam also heavily tests the three types of accrued depreciation. First is physical deterioration, which is simple wear and tear, like appealing paint or a leaky roof. Second is functional obsolescence, which stems from outdated design or features, such as a five bedroom house with only one bathroom. Both of these can be either curable or incurable. The third type external obsolescence is caused by factors outside the property's boundaries, like a nearby landfill or constant airport noise. On the exam, remember that external obsolescence is always considered incurable by the property owner, because they cannot control it. Finally, a critical exam trap is forgetting to add the land value back into the equation. The cost approach formula always starts by calculating the depreciated value of the improvements, and then adds the value of the land, because land itself is never depreciated. For free practice questions, AI-powered explanations and more exam prep tools,

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